On July 26, 2021, the government presented a draft law introducing extensive changes to the Polish tax and social security laws, which until August 30, 2021 will be the subject of public consultations conducted by the Ministry of Finance. The changes are referred to as the “Polish Deal”. Among the proposed developments there is also an important change introducing the additional 9% health insurance contribution on the management board fees.
Current rules
Under the Polish law the management board members can be remunerated under a resolution of the respective body of the company. If a company decides to remunerate a member of the management board for the duties performed based on the resolution only, the management board fees are subject to progressive tax rates of 17% or 32%. Such income obtained by members of the management board who are Polish tax non-residents is subject to the 20% lump sum tax rate in Poland.
At the same time, under the current law, the management board fees provided under the relevant resolution are not subject to the Polish social security or health insurance contributions. The legislator plans to change this rule within the framework of the Polish Deal.
Health insurance contribution due on the management board fees
Based on the draft bill, starting from 2022 the income received by the management board members under the respective resolution would constitute the basis for the obligatory 9% health insurance contribution (which will be non-deductible from the personal income tax in Poland).
This would be a significant burden for both management board members and companies which, in order to maintain the current level of remuneration of their executives, will potentially have to take into account an increase in their gross remuneration.
Impact of the proposed changes
The changes will result in an increase in the dues on the management board fees by 9% and the total burdens will increase to even about 45% for the high earners (with revenues above PLN 1 million per year). For non-resident taxpayers entitled to the 20% lump sum tax regime, the total burdens will increase to around 29% of their salary.
It should be noted that currently the health insurance contribution is in major part deductible from the tax in Poland. Under the draft bill presented as part of the Polish Deal, the health insurance contribution will not be tax-deductible at all.
Who will not be affected by the changes?
Generally there are no exceptions to the basic principle and all the board members would incur higher costs due to the above-mentioned elimination of the possibility of deducting the health insurance contributions from personal income tax.
It should be noted that the change will also apply to the income earned by the members of management boards of companies registered not only in Poland, but also abroad, as long as a given person may be subject to the Polish social security scheme.
On the other hand the changes will not impact the board members of the Polish companies who are covered by the social security system in one of the EU/EEA countries or in another country with which Poland has concluded a social security totalisation agreement (e.g. the USA, Canada, Korea or Australia). Income earned by such individuals is exempt from the Polish social security and health insurance contributions and consequently, the additional 9% burden would not be due from their remuneration.
In these cases, the certificate of coverage, issued by foreign insurance institution (e.g. A1 certificate), will be required to justify the lack of respective obligation to pay the Polish health insurance contributions.
Consequences of changes for the companies
Please note that the obligation to remit the health insurance contributions by the non-Polish companies engaging the management board members, which until now were not subject to the mandatory social security coverage in Poland, may require registration of foreign companies with the Polish social security authorities.
Finally, it should be underlined that due to the elimination of the possibility of deducting health insurance contributions from the personal income tax, also members of the management boards remunerated on the basis of employment contracts would incur higher costs of tax burdens in 2022.
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